According to President Joe Biden, earning $400,000 a year makes you wealthy. Or maybe it’s $10 million now, if you go by the promise that the wealthy will pay their fair share in taxes to help fund the Democrats’ new spending bill. To most Americans, either number sounds ridiculously high. Median household income in 2020 was $67,521. If earning in the top 10% makes you rich, then your household would earn about $200,000, far below either cut-off.
Of course, it’s all relative. How far your household income goes depends on the size of your household and where you live. But it’s exactly that relativity that shows the absurdity of the promise that the wealthy will pay their fair share. Not only does the pledge sound punitive (which is not the purpose of taxation), it’s totally unrealistic. Wealth is impossible to define and subject to political manipulation. The spending we are contemplating is so large, everyone will eventually pay their share—even those “middle class” households earning a mere $200,000.
If there is one constant throughout the spending-bill drama, it’s the promise that only the wealthy would pay for it. And Biden has been consistent that by wealthy he means income above $400,000. The latest version of Build Back Better contains taxes on investment income for people who earn more than $400,000. There are some new income taxes on high earners, now defined as people who earn more than $10 million a year. But it also increases the State and Local Tax (SALT) deduction to $80,000. This is the most expensive line item of the bill, estimated to cost $275 billion over the next five years. It would be a large tax cut that mostly benefits high earners. The Committee for a Responsible Budget estimates 98% of that money goes to workers with six-figure incomes, with 23.5% going to households earning more than $500,000.
While surely everyone can agree you’re a high earner if you make $10 million a year, for most people the category is more subjective. A household with three children earning $200,000 in a coastal city may feel more financial stress than a single person in Boise, Idaho, earning $50,000. Back in 2016, the Democrats were defining the high-earnings cutoff as $250,000, which put a household almost into the top 5%.
But whenever any six-figure sum is defined as a high earner, we are quickly reminded that if you live in an expensive city like New York or San Francisco, between private schools and housing, this money really doesn’t go that far. Biden gets a lot of support from expensive coastal cities, which may be why “wealthy” just got redefined to $400,000 a year in income.
To be sure, the argument that $250,000 doesn’t get you far sounds crazy and tone-deaf to most people—especially the half of U.S. households earning less than $67,521. After all, things like private schools and restaurant meals are luxuries many Americans do without. But there is some validity to the idea. Many jobs are located in high-tax states and pay higher wages because of that, while the tax code doesn’t fully account for higher costs of living.
No matter where you live, picking an income level and calling someone wealthy is a nonsensical exercise. First of all, it confuses wealth and income. Some high earners still live above their means and don’t have much wealth. One year of income also doesn’t reveal much. Financial decisions are typically based on lifetime earnings, or at least average income over a few years.
For most people, earnings peak in their 50s, which is when they’re paying for their children’s college, elder care, and getting serious about saving for retirement (though there are tax breaks for all those). Going after high earners in many ways is really just targeting people in late middle age. And it’s not just the top 5%. One study estimates 36% of Americans will earn in the top 5% of income at least one year of their life, 11% will earn in the top 1%. Often, you’ll only earn that amount for just one or two years of your career. Only 3.7% of Americans earn $250,000 or more for 10 consecutive years, and just 0.6% earn in the top 1%—about $500,000 — for 10 years.
If the goal is targeting the wealthy with higher income taxes, the rules should account for high income over a lifetime, or at least the previous five years instead of just a single year. We shouldn’t be penalizing people who have variable income year to year.